Is Saving Customers Important?

You are the owner of a security business with customers that produce recurring monthly revenue (RMR).

Each year some of these customers quit, leave, or just stop paying.As an owner, you ask yourself,

• How concerned should I be about the loss of these customers?
• What can I do about it anyway?

Think of your portfolio of customers as the water in a bucket. The amount of water in the bucket represents the present value of your existing customers (whether you keep the customers and harvest their cash flow over time or sell the business to another operator).

Each month you add new customers like water from the glass. As you pour each glass of water into the bucket, the bucket fills up, the company’s customer list grows and so does your recurring revenue.

Attrition is Like Leaks

Attrition Costs

If, on the other hand, you have more customer cancellations, the water leaks out faster and even though you continue to pour in new customers the company grows more slowly or not at all. Visualize this.

We’ll get into the details of attrition costs in a later post. For now, here’s a realistic example. Let’s say you have:

• 1000 customers at $32 average RMR per customer, and
• net attrition at the industry average rate of 10.5% per year.

You are:

• losing 9-10 customers per month, and
• spending $9,000 to $10,000 per month just to replace the RMR of the lost customers.

You are spending more than 25% of your total RMR just to replace attrition. In 10 years, 120 months, that’s $1,080,000 or more spent just to maintain each 1000 accounts. That is a lot of money!

If you have 5,000 or 10,000 accounts, multiply this number by 5 or 10.

The long term cost is millions of dollars. For a company in the SDM 100, even near the bottom, it is tens of millions of dollars over a decade.

Remember, the leaks keep leaking every day. Over time, the leaks threaten to drain the bucket and rob you of a large portion of the value you worked so hard to create.

• What does your bucket look like?
• Are there very few holes? …a lot of holes?
• How much of each month’s new customer creation is diverted to replacing attrition?

Make Customer Retention A Vital Strategy

Companies that fail to make a serious investment in retaining their customers reach a point where, each year, a larger and larger percentage of their new customer creation is diverted to replacing attrition.

Performance peaks, growth slows and value levels off or begins to decline, often quite rapidly.

Customer retention is a growth strategy, a strategy that frees new customer creation from some, or all, of the burden of replacing attrition.

Here’s an example of how customer retention leads to faster growth:

• The company in the example above is creating, let’s say, 20 new accounts a month.
• It is losing 9 or 10, so its net growth is only 10 accounts per month. In a year, net growth is only 10×12=120 accounts or a 12% increase in the original 1000 accounts.
• On the other hand, with a robust customer retention program, if the net attrition rate is diminished by say 50%, from 10.5% to 5.25%, the burden of attrition replacement would be reduced from 9 or 10 per month to around 5 per month.
• The company grows faster. In this case, it grows by 20-5=15 accounts per month or 18% a year.
• Would you rather grow 12% or 18% a year?

Customer retention saves customers so new customer creation doesn’t have to replace them. The whole company grows faster.

Customer retention is a strategy that deserves as high a priority as new customer creation, and it deserves significant investment.

After all, a retained customer is at least as valuable as a new customer and a customer retention program requires a lot less investment than the cost required to replace the lost RMR by creating new customers.

This is the first in a series of posts to help you properly prioritize customer retention and take actions to create a robust customer retention program.

The key takeaway is:

Customer retention is vital to the company’s growth and its future.

The key takeaway from future posts will be:

You can reduce or even eliminate (yes we said even eliminate) net attrition if you give customer retention the priority and resources required.

You cannot afford to ignore attrition or take it lightly.  Controlling your rate of customer loss is critical.

What do you think? Leave us a comment or ask a question. We will respond.

Larrabee Ventures, Inc. (LVI)

LVI is staffed by highly experienced alarm professionals.

William Larrabee (“Bill”) has started three alarm companies from scratch, been president of five different alarm companies, and worked through crisis situations in numerous companies, either as an on-site executive or paid financial advisor. Bill knows the alarm business.

Michael Carter (“Mike”) has been a sales manager and vice president of sales and marketing for five of the largest alarm companies in the US. He also has ten years of experience driving sales and marketing programs as a consultant and coach. Michael knows sales, marketing, and sales management for alarm companies. For more information about LVI please visit our website: Larrabee Ventures.com.

Together we will answer your questions and help you get your business out of the fog and back on the open road.